Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Tuesday, October 25, 2011

PERRY'S TAX PLAN

“The folks in Washington might not like to
hear it, but the plain truth is the U.S. government spends too much. Taxes are
too high, too complex, and too riddled with special interest loopholes. And our
expensive entitlement system is unsustainable in the long run.”

And
goes on to propose a “’Cut, Balance and
Grow’ plan to scrap the current tax code, lower and simplify tax rates, cut spending
and balance the federal budget, reform entitlements, and grow jobs and economic
opportunity”.

The
portion of Perry’s plan that concerns 1040 filers includes the following
provisions -

·Give
Americans “a choice between a new, flat
tax rate of 20% or their current income tax rate. The new flat tax preserves
mortgage interest, charitable and state and local tax exemptions for families
earning less than $500,000 annually, and it increases the standard deduction to
$12,500 for individuals and dependents.This
simple 20% flat tax will allow Americans to file their taxes on a postcard.”

·“Eliminate the tax on Social Security
benefits, boosting the incomes of 17 million current beneficiaries who see
their benefits taxed if they continue to work and earn income in addition to
Social Security earnings.”

·“Eliminate the tax on qualified dividends and
long-term capital gains to free up the billions of dollars Americans are
sitting on to avoid taxes on the gain.”

·Abolish
“the death tax once and for all,
providing needed certainty to American family farms and small businesses”.

·Repeal
ObamaCare.

·Give
“younger workers the option to own their
Social Security contributions through personal retirement accounts that
Washington politicians can never raid. Because young workers will own their
contributions, they will be free to seek a market rate of return if they
choose, and to leave their retirement savings to their dependents when they die.”

My reactions –

1)I support his flat tax proposal,
keeping only the deductions Perry suggests.But I would not limit the deductions based on AGI.I do not see why we should offer taxpayers a
choice between a flat tax and the current tax – shred the current tax system
completely and establish the flat tax.
This is not the first time a choice has been suggested, and I opposed it the first time around. And, as I have said when this idea was first proposed (I think by
Obama), I doubt a “postcard” tax return would be sufficient to properly report
income.At best there would be a
one-page 1040-EZ.

2)While I am not against exempting
Social Security and Railroad Retirement benefits from taxation if it fits into
the plan, I have in the past suggested that we instead tax these benefits the
same as any other retirement plan distribution under the current Simplified Method.

3)I do not support completely eliminating
tax on “qualified” dividends and long-term capital gains.As I have said in the past, I would allow
corporations a “dividends paid deduction”, tax all dividends received by
individuals as ordinary income, and allow a 50% “capital gain deduction”.

4)I would support abolishing the
so-called “death tax” as long as we maintain the stepped-up basis of inherited
property. Keeping the stepped-up basis is more important to me than repealing the estate tax altogether.

5)I do believe that the current “Obamacare”
system is too convoluted and would support its repeal, as long as Congress
looked at other ways to provide relief for high health insurance costs.

6)I am all for allowing new workers
entering the Social Security system to “own” their accounts.I would support employee and employer
contributions to Social Security being deposited into an actual account, untouchable
until age 62, which allows workers to select either a money market, US
Treasuries, or an index fund, or a combination thereof, and allows balances to
be transferred to the separate Social Security accounts of beneficiaries upon
death.

3 comments:

Is this plan seriously to leave the current system in place and add an alternate version in addition to it? That's what it sounded like in other places I was reading about it too, but how is that a plan to simplify?

In other words, people who can afford a tax professional will calculate it both ways and pay the lesser amount, whereas lower income taxpayers will go the easier way even if it means paying more.

You are correct that he is offering taxpayers a choice between a new flat tax or being taxed under the current FU-ed system.

As I said in the post - "I do not see why we should offer taxpayers a choice between a flat tax and the current tax – shred the current tax system completely and establish the flat tax. This is not the first time a choice has been suggested, and I opposed it the first time around."

You are correct that with a choice taxpayers will obviously do both calculations and choose the lower tax. This is what I tell my clients and readers all the time - if you are given a choice review the options and choose the one that results in the lower tax.

Offering a choice makes absolutely no sense. But this is not the first time this was suggested. There must be some political currency in suggesting this.

My main question is, if there is no deduction for 401k and IRA contributions, does this mean that tax will not be paid on them in retirement as all the contributions are made on taxed income and the growth is capital gains

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